Theoretically, tech companies valuations are based on the notion that the best place for them to invest money is internally, that their internal flywheel is the absolute highest return on capital.
Practically speaking, they also need to build data centers, and real estate has more pedestrian (returns and) valuations, even when it houses fantastical uber tech.
The article is poorly written. This deal is mostly debt financing with only a little bit of equity.
In terms of corporate capital structure, shareholder returns are usually maximized by taking on at least some debt (leverage). The precise optimal proportion of debt depends on several factors, particularly credit rating.
Make the numbers look better? There must be benefits of moving these numbers from column to some other column. Or even partially hiding them. Thus allowing stock to be priced higher based on some metric...
if you have $100M and you need a $1M, you'd use your credit line and borrow $1M and pay it back from interests coming from $100M. it's not that different in corp.
That depends heavily on the terms of the loan you can secure and how you choose to invest the cash.
When you borrow $1M against $100M in cash or assets its generally considered a very low risk loan, meaning you'll likely get good terms and comparatively low rates.
You need to consider secured line of credit vs unsecured and the interest rate is significantly different as one is backed by collateral and the other is not.
Isn't the first rule of business that you spend other people's money, whenever possible?
Another #1 is to get a good return on your money.
But tech companies horde cash because they don't have anywhere they see as a good investment.
You'd think investing in their own data centers would get a better return than cash.
Kind of makes you wonder why everyone is so eager to fund these projects for them.
Theoretically, tech companies valuations are based on the notion that the best place for them to invest money is internally, that their internal flywheel is the absolute highest return on capital.
Practically speaking, they also need to build data centers, and real estate has more pedestrian (returns and) valuations, even when it houses fantastical uber tech.
Because that’s the only place with growth
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Good points, but after processing other replies in this post, I would change the last sentence to:
Is Meta so unsure about this investment, that they decided to spread the risk and profit to other parties, even though they could fund it themselves?
(AI bubble death knell ?)
The article is poorly written. This deal is mostly debt financing with only a little bit of equity.
In terms of corporate capital structure, shareholder returns are usually maximized by taking on at least some debt (leverage). The precise optimal proportion of debt depends on several factors, particularly credit rating.
Make the numbers look better? There must be benefits of moving these numbers from column to some other column. Or even partially hiding them. Thus allowing stock to be priced higher based on some metric...
if you have $100M and you need a $1M, you'd use your credit line and borrow $1M and pay it back from interests coming from $100M. it's not that different in corp.
That doesn't make any sense.
You'll be paying a higher rate of interest on your loan than you're receiving on your cash.
You'd be better off taking the $1m directly out of your cash pile.
That depends heavily on the terms of the loan you can secure and how you choose to invest the cash.
When you borrow $1M against $100M in cash or assets its generally considered a very low risk loan, meaning you'll likely get good terms and comparatively low rates.
Not necessarily. You can get an interest rate lower than your investment return rate.
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You need to consider secured line of credit vs unsecured and the interest rate is significantly different as one is backed by collateral and the other is not.
Dump risk on others
> structured in such a way as to keep the debt off of the Social Network's balance sheets